By: O. Sam Ackley
In last week’s post, “Fintech and Today’s Banking System,” I covered the reasons Fintech is struggling to grow in the US banking system. Below are my ideas for building a bridge between the two.
Building Bridges
Banks and consumers alike want to do business with financial technology firms that are creating a wide variety of apps. Yet, according to many studies and serious observers, Fintech is struggling when it comes to having access to the U.S. banking system.
The five major obstacles are:
- Regulations
- Technology
- Safeness and Soundness
- Reputational Risks
- Unknowns
The banking system and Fintech must build bridges because Fintech is a market driven imperative. The question is how painful it will be and how long will it take. In my view it doesn’t need to be painful or drawn out.
The Fintech Lab: Reduce the Friction Between Fintech and Banking
I can visualize a collaboration between banking, government regulators, and the financial technology industry that addresses the inherent friction between Fintech and banking, to the benefit of both. The collaboration can be set up through a Fintech Laboratory (possibly non-profit) affiliated with an existing bank.
Why a Nonprofit?
Because the results of this effort need to be available to all – government, banking, and Fintech. Typically competing banks do not share information. Also, the government does not typically provide resources to for-profit endeavors. To be effective, the knowledge gained must be generally available to all.
Why Affiliated with a Bank?
A bank can facilitate services that would not otherwise be available to a typical Fintech incubator or participating Fintech entities. For example, a sandbox banking environment that would allow Fintech coders to work with banking APIs. Access to risk and compliance bankers, access to bank credit officers, and access to retail banking for pilots.
What’s in it for a Bank?
Why would a bank undertake such a project and why would it contribute resources? Obviously, there needs to be a profit motive for the participating bank(s). This can be addressed in many ways, all of which allow Fintech Laboratory to act independently and which support transparent results.
For example, a bank can offer advice and banking services to responsible Fintech once they have “demonstrated” their ability to bridge the gaps noted above. The bank could ask for a small equity position in exchange for access to the banking sandbox and other banking resources. Plus, the bank can learn in the process and help educate vendors and regulators, thus gaining early insight to public policy shifts.
Head in the Clouds, Feet on the Ground
I enjoy writing about the evolution of our industry and sharing my ideas for the future. But I realize that our customers must reduce payment processing costs and increase efficiency now. And you can do exactly that by accessing our Fintech Cloud℠ using our open API.
